Tips For Doing Business in Iran
Following the recent nuclear agreement, a significant number of EU and U.S. companies have started reassessing their strategies towards Iran. There is a growing consensus that any market share gain or profitable growth in the short to medium term will materialize only from effective strategic planning that must take place right now.
U.S. companies contemplating reentering Iran will want to draw upon broad sources of expertise as they consider their strategy in this new environment. Engaging legal counsel will be essential but not sufficient. The future of U.S.-Iran political and economic relations will be determined through a complex interplay among the U.S. administration, Congress, and the politics of the 2016 elections.
Sanctions policies and regulations of the European Union and other countries will need to be considered and evaluated. Accurate information and interpretation of developments in these areas will be critical to avoid reputational harm and forecast risk, and to seize early-mover opportunities when legally permissible.
Iran has the ambition of becoming the economic and technological powerhouse of the region. Although the imposition of sanctions has had a significant negative impact on reaching this objective, the ambitions remain in place. Key economic indicators such as inflation and unemployment have been improving in spite of sanctions and with its abundance of natural resources, Iran is poised for significant growth in the post-sanctions era.
Iran also aims to develop a knowledge-based economy and as such is looking for the two important elements of skill and technology transfer in its partnership with foreign entities. According to the latest estimates, Iran is in need of $2 trillion of industrial investment over the next 10 years. The country is moving away from an import-based mentality to one based on the development of its manufacturing base and export potential. As such entities that opt for the establishment of independent or joint production units will be preferred over those seeing Iran as just an export destination.
In order to match corporate strengths and market opportunities, foreign companies need to identify their key target sectors, conduct thorough research on what is happening in those sectors and ensure full justification for entering those markets.
Once business justification has been established, the most appropriate market entry strategy must be selected, either direct or indirect. Given that Iran has just started emerging from international isolation, the latter option seems to be favored as a first step in order to minimize risks.
Local partner selection is also a key exercise that will have to be diligently undertaken in indirect entries. It is worth mentioning that Iran has significantly reduced foreign investment risks through the introduction of the Foreign Investment Promotion and Protection Act, which allows the repatriation of foreign capital and corporate profits as well as providing protection against any loss as a result of direct action by the government that may lead to disruption in the business activities of the foreign entity. Iran has also taken serious steps in encouraging foreign presence through allowing 100 percent foreign ownership of companies and offering competitive corporation tax rates.
Iran is keen on concluding business negotiations and witnessing actual investment and physical presence as soon as possible. Experience shows that foreign entities that entered the Iranian market during relatively risky and unstable periods, have benefitted from their first-mover advantage. In contrast, those business partners that left the Iranian market as a result of the imposition of sanctions now find themselves in unfavorable situations in their attempt to re-enter the Iranian market. Without visible action and commitment, no foreign entity is likely to be taken seriously.
In devising strategies and implementation plans for Iran, make use of reputable local consultants who can bring significant value to the table though their local knowledge and deliver time and cost savings through lessons learned from past experiences.
Mehrdad Parhizkar, a partner at Frontier Partners, has 25 years of consultancy experience in the UK and Iran. The UK experience has mainly revolved around public sector consultancy. In Iran, Mehrdad has advised multinational clients on investment opportunities, market entry, and risk management, and local partner selection.